2017 Year in Review

This will be our last full post for 2017, so we decided to do a year end wrap-up. The work below draws from all of the posts that we made this year and uses quotes from management to tell the story of 2017. Click here to join our weekly email list.

2017 began and ended with excitement about tax reform. In between, equity markets climbed to new peaks as optimism boomed and the economy posted solid growth.

Even though stocks posted one of their better performances in history, 2017 felt like a strangely boring year. Not much happened except for unwavering optimism. Although the fundamentals were positive, the stock market really felt like it was going up “just because.”

Nothing exemplified the zeitgeist of 2017 better than Bitcoin, which rose 1,642% between January and December 15. Stock prices diverged from fundamentals many years ago, but at least they have fundamentals. Bitcoin is an asset with zero intrinsic value. It rose only because buyers believed that it would go up.

This type of thinking is typically a hallmark of the extreme late innings of an economic cycle. Rising inflationary pressures and a tightening Federal Reserve are also hallmarks of the end of an economic cycle. We saw both in 2017. Of course, this has not been a typical economic cycle, so anything is possible, but 2018 is unlikely to look like 2017.

“I could spend all day on tax reform.…the lowering of the corporate tax rate would be a good thing…And then the other one is obviously what they’re talking about relative to overseas earnings and repatriation…For us, this is potentially a really big positive” –Pfizer

But Congress decided to focus on healthcare reform first

“our legislators have been telling us [that] the first thing that’s going to happen in Congress…is Obamacare…So Congress has a lot on its plate right now. And to work through all of the details and get [tax] legislation like that passed, well, Congress is telling us it’s going to be a while in any event.” –Constellation Brands

“The optimism for positive change here at Bank of America and among our customers is palpable and has driven bank stock prices higher. We will have to see how these topics play out, but we are optimistic.” —Bank of America

“Obviously our new administration is pro-business, but there’s a lot of moving parts in that…I think we’re all waiting to see if there’s a tax reform package that would allow us the ability to access overseas cash and repatriate cash…I think that would make a big difference for a lot of multinationals” —Abbott Labs CEO Miles White (Healthcare)

“I think all of us recognized we’ve got a new administration in Washington which has an agenda to be friendly to business and I think, we’re anxious to see how all of that will play out certainly tax reform is the biggest single item that we’re focused on this year.” —United Technologies CEO Greg Hayes (Conglomerate)

And that helped give businesses confidence to invest in growth

“As I have gone around the state, visiting all our locations during the month of December, one thing it was a consistent message was how many customers particular I would say mid and small customers are moving forward with plans that they had, had delayed, right? Somebody had a piece of equipment they want to put in and they can wait for six months, after they got the clarity from the political situation, the word was let’s move forward, let’s move forward now. So I think you are definitely seeing just general optimism in the market moving forward…I think we are seeing momentum increase. I would expect loan growth to be better than 2016 for sure.” —Cullen Frost CEO Phillip Green (Bank)

“the animal spirits are real, there is no doubt about it…when you have the whole herds thinking about slow global growth and that’s just the way it is and that’s just the way it’s going to work, well, it becomes self-reinforcing because we all act that way…but right now the feelings are better than I’ve seen them in long time and that could be enough to get the herd moving in the direction of saying, I’d better not miss this moment as oppose to just hunker down and keep waiting it out.” —Honeywell CEO Dave Cote (Conglomerate)

But the hard data wasn’t keeping up with the soft data

“client sentiment has clearly and markedly improved. With that said when you look at their actual activity levels…There is a little sense of urgency…they are waiting to see more activity in their business before their hiring activity reflects that.” —Robert Half CEO Harold Messmer (Temp Staffing)

“The S&P 500 is trading at roughly 19 times earnings, 3 turns higher than the 50-year average of 2016. These valuations make me uncomfortable, especially given the unknowns in taxation, foreign trade, regulation and more…To sum up, in my opinion, the markets are priced for perfection, and they have been that way for quite some time, complacency reign supreme. However, my experience has shown me that this state of affairs won’t go on indefinitely…It’s a tough market in which to be a disciplined buyer.” –Loews

“The stock market has hit record numbers, as you know, and there’s been a tremendous surge of optimism in the business world, which means something different than it used to. Now it means it’s good for jobs. Very different. Plants and factories are already starting to move back into the United States, big league, Ford, General Motors.” —PresidentDonald Trump (Government)

“I think everybody is optimistic…it’s really not specific to one particular industry, okay. It’s really across the board and it’s across the country, whether it be if you’re on the East Coast, West Coast, the mid chapters, what have you, all of our companies are all simultaneously doing better than, frankly, we would have thought.” —Reliance Steel CEO Gregg Mollins (Steel Distributor)

“Well, there’s no question that animal spirits have been unleashed a bit post the election. Stock market is up a lot. Household and business confidence have increased significantly…there’s no question that sentiment has improved quite markedly post the election.” —Federal Reserve Bank of NY President Bill Dudley (Central Bank)

“Our industry is the midst of a seismic shift, and, of course, you read the headlines. In fact, many of you write the reports, we’re operating in an incredibly challenging environment. All across the retail industry, many of our competitors are aggressively rationalizing their assets. They are closing stores, exiting markets. They’re cutting costs just to keep their heads above water. We’ve not seen this number of distressed retailers since 2009 in the Great Recession.” —Target CEO Brian Cornell (Retail)

“I think it’s fair to say that many of my colleagues and I note a much more optimistic frame of mind among many, many businesses in recent months…the shift in sentiment is obvious and notable.” —Fed Chair Janet Yellen (Central Bank)

They raised rates in March, but continued to take an accommodative stance

“Even after this increase, monetary policy remains accommodative…the data have not notably strengthened…we haven’t changed our view of the outlook. We think we’re on the same path; not, we haven’t boosted the outlook projected faster growth. We think we’re moving along the same course we’ve been on” —Fed Chair Janet Yellen (Central Bank)

“There’s clearly a sense of general optimism in the market. There’s a perception that jobs are being created and that wages are actually starting to move upward. There’s a solidifying sense that the government has adopted a business-friendly posture and that will result in real changes to tax rates and to the regulatory environment.” —Lennar CEO Stuart Miller (Homebuilder)

“The first quarter was an interesting one, as we entered it with a lot of optimism about what the new administration might do to further improve the economy. As the quarter continued, some of this optimism has slowed and now companies are more cautious or skeptical about what shape some of the programs, including tax reform, infrastructure projects and ACA reform will take and when they might actually take effect, if at all.” —Brown and Brown CEO Powell Brown (Insurance Broker)

The yield curve fell along with expectations

“So, because that stimulus hasn’t occurred, it still may, but certainly is lower probability today than it was in November and December. They were back down in lower 10-year rates, lower mortgage rates than we were there for a while. And now we have to ask ourselves again, are we going to be lower for a while, lower for longer or are we still awaiting for a shoe to drop in for there to be a big backup in rates?” —Wells Fargo CFO John Shrewsberry (Bank)

Companies said that they were waiting for more clarity on policy

“In general, when we talk to our RMs and talk to the customers, I think the general sentiment is one of optimism, but they’re in kind of a wait-and-see mode. And they’re just waiting, I think, for more certainty about which direction the administration is going to go” —M&T Bank CFO Darren King (Regional Bank)

“You had a fairly anemic GDP growth rate this first quarter. The projections are for great improvement coming up and we hope that’s the case…you read almost every day and you see in the press virtually every day…the gap between hard data and soft data, sentiment optimism on the one hand and actual levels of activity on the other.” —Robert Half CEO Harold Messmer (Temp Staffing)

“Information received since the Federal Open Market Committee met in March indicates that the labor market has continued to strengthen even as growth in economic activity slowed….The Committee views the slowing in growth during the first quarter as likely to be transitory” —The Federal Reserve

Global growth began to kick in

“When the US economy, which is approximately 20 trillion, does well much of the world does well. To us this means our concerns of China or Europe precipitating a worldwide recession depression have been significantly reduced, but not delaminated. Also the trade policies of the US could precipitate a collapse in world trade.” – Fairfax Financial Holdings CEO Prem Watsa (Insurance)

“It’s nice to hear people talking about Europe in a positive way. We’re really seeing growth in a broad way you haven’t seen in 5 or 10 years. The political risk in Europe is coming down. Europe is in the 3rd inning of a recovery. The US, depending on Trump, is somewhere between the 7th and 9th inning.” – Polygon Global Partners LLP Founder Reade Griffith

By mid year it was clear that relatively little change would actually be coming from Washington

“You’ll probably get some tax reform and it will more likely resemble a tax cut as opposed to broad-based reform” – PIMCO Global Chief investment officer Dan Ivascyn

But investors kept buying anyways

“The level of complacency about where markets are today is pretty scary. People are just sort of assuming it’s OK, that it is what it is, and I have to say that I’m a little bit concerned about it.” – TPG Co-CEO Jon Winkelried

“We’re on increasing watch for volatility…there is a massive amount of money that is being short VIX. It’s a trade that’s made a lot of money and its very very crowded, which suggests to me the days of low volatility are numbered…If you’re a trader or a speculator I think you should be raising cash today, literally today. If you’re an investor you can easily sit through a seasonally weak period” —Doubleline CIO Jeff Gundlach (Asset Management)

“a lot of what’s driving people to the market is a sense of confidence, it’s animal spirits…the confidence that people bring with them to the table about whether their job is stable and whether there’s going to be a wage increase or there is opportunity for them to move and be mobile to the next job opportunity.” —Lennar CEO Stuart Miller (Homebuilder)

After years of slow growth, a simple return to normal felt euphoric

“The slow and steady though sometimes erratic market improvement that we have seen for the entirety of this recovery continues to seem to be giving way to a more definitive reversion to normal.” —Lennar CEO Stuart Miller (Homebuilder)

Central Bankers began to feel like they could begin to unwind accommodative policies

“for the first time in many years, the global economy is experiencing synchronous growth, and authorities in the euro area and the United Kingdom are beginning to discuss the time when the need for monetary accommodation will diminish.” —Federal Reserve Governor Lael Brainard (Central Bank)

The Fed started to talk about shrinking its balance sheet

“If the economy continues to evolve in line with our expectations, it is something we should begin to do this year. To my mind, I would say relatively soon. The exact timing of this, I do not think matters a great deal. It is something we have long been preparing to undertake.” —Federal Reserve Chair Janet Yellen (Central Bank)

At the same, time retail investors started to pour back into investment markets

“We are seeing this quarter very broad-based engagement in the market, so everyone from brand-new customers opening their first account to very active traders seem to be engaged in the market. We saw a good activity across pretty much all of our products.” —TD Ameritrade CEO Tim Hockey (Broker)

Voices of warning were few and far between

“…don’t be mesmerized by the blue skies created by central bank QE and near perpetually low interest rates. All markets are increasingly at risk….Strategies involving risk reduction should ultimately outperform “faux” surefire winners generated by central bank printing of money. It’s the real economy that counts and global real economic growth is and should continue to be below par.” —Janus Portfolio Manager Bill Gross (Investment Management)

The original reasons for optimism never really materialized but it’s better to be lucky than right

“I guess this is a case of better lucky than right. We expected the market to go up but for different reasons. We thought it would be based on generally positive growth oriented policies enacted by the administration, lower taxes, infrastructure spending, healthcare, reform et cetera, none of these things transpired. But what has transpired has been kind of global synchronized economic growth and a very accommodative global monetary structure. So, I’m happy with the outcome the reason for it was different from what we anticipated, but we’ll take it.” –Third Point CEO Dan Loeb (Hedge Fund)

“It’s definitely cyclical folks, I mean you will have a volatile market…people panic. People panicked in 2008 and 2009, they panicked in the 1989, they panicked in 1994, they panicked in Asia in 1997, they panicked in the Internet thing in 2000, the people will panic, you will panic. You will all be running through the door like everybody else and regulators will panic and – come on, and I just said, the government support $12 trillion securities that has to have some effect on depressing volatility…so the market will become more normal again one day” —JP Morgan CEO Jamie Dimon (Bank)

And warned against chasing the hot dot

“it will eventually blow up. It’s a fraud okay. And honestly I’m just shocked anyone can’t see it for what it is.” —JP Morgan CEO Jamie Dimon (Bank)

“in October we will begin the balance sheet normalization program that we outlined in June. This program will reduce our securities holdings in a gradual and predictable manner.” —Fed Chair Janet Yellen (Central Bank)

“I think we are absolutely seeing that continued momentum, particularly in the upper end of the economy” —Vail CEO Rob Katz (Ski Resorts)

Labor markets became particularly robust

“The often discussed labor shortage in many sectors of the economy is translating into wage growth. And while much of the data collected by the government doesn’t seem to reflect significant wage growth, the customers visiting our Welcome Home Centers are reflecting an optimistic sentiment and an ability to afford today’s more expensive homes.” —Lennar CEO Stuart Miller (Homebuilder)

“not just in the U.S. but as we look around the world we would rate the health of the consumer right now is pretty good…as you look across the world unemployment is low, employment is high. Probably the bigger challenge to the consumer or to the worker has been the lack of wage growth…And we’re beginning to see some of that and again that’s helping to the consumer.” —Citigroup CFO John Gerspach (Bank)

“we saw more cash go into the markets, particularly the equity markets as those markets rose around the world. And we’ve seen cash in our clients’ accounts at its lowest level.” –Morgan Stanley CEO James Gorman (Broker)

“Industrial demand remains strong…I would say that certainly the demand was broad based. If you look across our product lines, we’ve got 65 to 70 different product lines, and the demand was very strong across those as well as strong across the region. So we had revenue up in three of the four regions year on year in Europe, Asia and the U.S., and it was about even in Japan.” —Texas Instruments (Semiconductors)

Booms come with inflationary pressures

“I mean obviously we’re in a bit of an inflationary environment for some of the commodities…” —Honeywell (Industrial)

“It’s an environment where the uncertainties are unusual in terms of number, scale and insolubility, where prospective returns are just about the lowest they have ever been, where asset prices are high across the board and where pro-risk behavior is commonplace. It’s impossible for us to predict what will catalyze the market’s correction, how severe it might be and when it will occur…We do not believe this is a time in the cycle for reaching for return” —Oaktree (Investment Management)

“I fundamentally believe the recovery is going to spread out over two years. I think the recovery is going to be spread out over 2018 and 2019….I fundamentally don’t believe the bigger projects will start happening…until late 2018 early 2019. ” —Emerson (Industrials)

“there has been an increase in bad debt expense driven in part by the growth in uninsured revenue.” —Tenet (Hospitals)

“As it relates to credit…we are seeing a little bit more of a normalization as we move forward…we actually have seen a little higher level of reserves that need to be put in place, as well as some financing charges that have been recognized” —JC Penney (Retail)

“Our third quarter Consumer Sentiment Survey highlighted that consumers have an increasingly positive view of the national economy and continue to view their personal financial situation favorably. Given that over half of homeowners believe their home values are increasing, intent to engage in discretionary home improvement projects remains strong.” —Lowes (Home Improvement)

“we’re very excited about where the tax reform is headed, we’re especially excited about the house version because it starts almost immediately where the Senate is the later year.” —Kroger (Grocery)

That put the cherry on top of 2017

“our expectation is that…tax reform…will create a little bit more momentum. Exactly how much momentum? I am not 100% sure but could you imagine that increasing whatever the run rate GDP is by half a percent, I think that’s a reasonable assumption, may be not happen on January 1 but this could happen overtime.” —Wells Fargo (Bank)

“Today, the Federal Open Market Committee (FOMC) decided to raise the target range for the federal funds rate by 1/4 percentage point, bringing it to 1-1/4 to 1-1/2 percent.” –FOMC

And Janet Yellen said goodbye

“Finally, I’d like to note that, although I have one more FOMC meeting to attend in the New Year, this will be my last scheduled news conference. Over the next month and a half, I will do my utmost to ensure a smooth transition to my designated successor, Jay Powell. I am confident that he is as deeply committed as I have been to the Federal Reserve’s vital public mission. Thank you for being such an attentive audience these past four years.” –FOMC

She will be sleeping well

“I mean of course the stock market has gone up a great deal this year, and we have in recent months characterized the general level of asset valuations as elevated. What that reflects is simply the assessment that looking at price earnings, ratios, and comparable metrics for other assets other than equities, we see ratios that are in the high end of historical ranges. And so that’s worth pointing out. But economists are not great at knowing what appropriate valuations are. We don’t have a terrific record, and the fact that those valuations are high doesn’t mean that they are necessarily overvalued. We are in a, I’ve mentioned this in my opening statement, and we’ve talked about this repeatedly, likely, a low interest rate environment lower than we’ve had in past decades, and if that turns out to be the case, that’s a factor that supports higher valuations. We’re enjoying solid economic growth with low inflation, and the risks in the global economy look more balanced than they have in many years. I think what we need to and are trying to think through is if there were an adjustment in asset valuations with the stock market, what impact would that have on the economy and would it provoke financial stability concerns. And I think when we look at other indicators of financial stability risks, there’s nothing flashing red there or possibly even orange…look, at the moment the U.S. economy is performing well. The growth that we’re seeing, it’s not based on, for example, an unsustainable, build-up of debt as we had in the run-up to the financial crisis. The global economy is doing well. We’re in a synchronized expansion. This is the first time in many years that we’ve seen this. Inflation around the world is generally low. So I think the risks are balanced, and there’s less to lose sleep about now than has been true for quite some time, so I feel good about the economic outlook.” –FOMC